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It’s now all about Fed policy and while the accompanying statement will contain limited information, it’s the event the market needs to put them closer to the same page of the Fed collective.
The investment and trading community always need to align positioning to that of Fed rhetoric, and while the market feels March is the right date for tapering (despite the weakening trend in data), we need to know that March is a date the Fed is eyeing as well. Given the capital markets are defined by central bank policy, we need to know what the Fed is currently thinking and what the potential triggers are for tapering (or increasing its asset purchase plan) are, and from here traders can assess whether the S&P 500 at 1772 or the US dollar index at 79.65 are right. Let’s hope some sort of clarity prevails after today’s FOMC meeting.
Still, prior to that meeting we get September CPI and ADP private sector jobs numbers; given the October non-farm payrolls are not even worth looking at, the ADP numbers could get more significance. A number above 150,000 could put a bid in the USD, which is starting to get some upside traction, and we have seen the June uptrend give way in GBP/USD, while AUD/USD and EUR/USD have started to look vulnerable. AUD/USD in particular looks like it has now become a ‘sell on rallies’ candidate, and a break below 0.9428 could see a much deeper correction.
Some last minute positioning ahead of NAB’s results
There has not really been too much apprehension from Asian traders ahead of the Fed meeting, with the ASX putting on 0.4%, and the banks showing further strength. NAB reports pre-market tomorrow, with expectations for cash earnings at $5.93 billion, with a solid dividend of 96 cents. Gross margins are expected to come out just above 2%, which is well below that of ANZ and highlights the bank’s push to attract borrowers through a much more compelling lending structure. Will it pay off in the customer numbers? Given the stock is down 0.3%, there seems a bit of hesitancy to suggest it will achieve this or the lofty 75% payout ratio expected. Bear in mind the stock has appreciated nearly 50% in twelve months.
China is flying
China is flying today, with the CSI 300 up 0.9%, although it’s the utility sector that is putting in all the gains. It’s interesting to see a slight move higher again in the repo market, with one-month Shibor also moving north too. At the same time, we are saw the PBOC fix USD/CNY 39 basis points higher, which is a pretty lumpy move higher from a central bank so keen on using the RMB as weapon to curb capital inflows and further hot money flows. It has to said though that while the world is talking about the above average beats on EPS and sales in the US, China is reporting quarterly earnings of its own and thus far corporate China is growing quite nicely.
With 78% of companies having reported, only 35% have actually beaten expectations on earnings, however when you are seeing 12.5% sales growth (26.2% EPS growth) it is still very compelling, especially with 42% sales growth in the banks. All eyes on Friday’s PMI print, with expectations of a slight increase in the pace of manufacturing expansion (51.2), however a number under 51 could throw some weight on the view that Chinese growth has peaked.
Ahead of the European open
Europe looks set for a flat open, with FTSE and S&P futures not really being overly influenced by a strong Nikkei or Chinese market. It’s not just Barclays that will be in play, but ENI and Volkswagen as well. On the forex side, there is a growing feeling that the EUR is the currency to be leveraged to right now; while this is being reflected in the EUR on a trade-weighted basis, we should start seeing a more pronounced move higher in the coming months, namely against the JPY and AUD (in my opinion). ECB member Ewald Nowotny usually represents the consensus of the ECB, and his comments yesterday that the bank simply lacks the tools to deal with a strong EUR have been noted by currency and rates traders.
Mr Nowotny even spoke out that another LTRO (long-term refinancing operation) is being discussed, which would address the liquidity issues at hand, given excess liquidity held by European banks has fallen below the key €200 billion. We are not overly concerned in moves in the credit markets, as moves so far have been subtle (EONIA now at 9.8bp up from 6.8bp in September), as current rates are still well below the levels we saw in 2008, when Eonia was at 460bp.
The fact that banks are repaying loans at the current rate makes it unlikely they are going to borrow funds again, even at very low borrowing costs. So, mix in balance sheet contraction at the ECB, with the idea of further repatriation flows as banks prepare for the October 2014 asset quality review (AQR), solid buying of European equities from offshore funds (causing EUR inflows), while data shows promise (notably Spain where retails sales recorded their first year-on-year gain yesterday since 2010) and you have the recipe for further gains. All-in-all the EUR should be a star performer right now, although my preference is for long EUR positions, is against the crosses given negative positioning in the USD. It will be interesting to see tomorrow’s October CPI estimate, which at 1.1% is still well below the ECB’s target of 2%.
What happens if we see a number below 1%? The conundrum the ECB faces with disinflation, limited room to cut rates (especially in light of Germany’s booming housing market), falling liquidity and a strengthening EUR, makes the task at hand for the ECB harder and harder by the day.